Tax advice: How to calculate the income tax liability for a non-resident client and HMRC to abolish

29 Aug 2018

Tax advice: How to calculate the income tax liability for a non-resident client and HMRC to abolish receipt checking for benchmark scale rates

Every year, our tax and VAT helplines receive over 55,000 calls. Each month, we provide a round-up of topical news and below is a summary of the key points our team has been discussing with accountants in August.

How to calculate the income tax liability for a non-resident client

We are often asked how the income tax liability for a non-resident individual is calculated. Typically this will be when the tax calculation on the software is producing an unexpected result by not giving the client a personal allowance.

Non-resident individuals have two options for calculating their UK tax liability:

Calculate it as you would for a UK resident individual, with a personal allowance (if they are entitled – see below) and the basic, higher and additional rate bands.

Calculate it using the 'disregarded income' (also known as 'excluded income') route. This limits the UK liability on certain types of UK income (the most commonly seen items are bank interest, dividends and the state pension) to the tax that has been deducted at source. The effect is that no further tax is due in the UK and higher/additional rate liabilities are avoided. The downside is the client does not get a personal allowance (hence why your software may not be giving one) to use against any other UK source income. HMRC’s helpsheet HS300 has more details.

The client must go with the option that gives them the lower UK tax liability. Some software will automatically work out which option is best, others will not. The way to trigger disregarded income is not to claim the personal allowance on the SA109 (as outlined below). For example, if the client has UK rental income, they may be better off under option one with a personal allowance. If their income is mostly from UK investments, then the disregarded income calculation will usually be beneficial.

Advisors should also check the relevant Article of the Double Tax Agreement that the UK has with the country where the client is resident, as some sources of income (especially UK private/occupational pensions) are only taxed where the individual is resident. In those cases, the client should claim treaty exemption via box 22 of the SA109 using HS304.

Who is entitled to a UK personal allowance?

A UK resident

A British or EU Citizen, residents of the Isle of Man or Channel Islands and British Crown Servants (such as diplomats and military personnel) – this is claimed by ticking box 16 of the SA109

People who are (tax) residents and nationals of certain countries with whom the UK has a Double Tax Agreement – this is claimed by ticking box 15 of the SA109

A full list of those who qualify is found on pages four and five of the SA109 notes.

HMRC to abolish receipt checking for benchmark scale rates

The draft tax legislation published in July 2018 contains proposals to simplify the tax treatment of the reimbursement by employers of subsistence expenses incurred by employees.

The current position is that employers can pay or reimburse UK expenses tax-free, provided they are within ‘benchmark scale rates’ and the employer has a system in place to check that employees have, in fact, incurred deductible expenses. Expenses are deductible if, in the absence of reimbursement by employer, the employee would be able to claim a deduction under s336-338 ITEPA 2003 for the amount spent.

Alternatively, the employer can reimburse actual expenditure incurred, which means that the employee has to provide receipts as evidence of the expenditure.

The proposed simplification will mean that employers will be able to pay or reimburse expenses free of tax, using the benchmark scale rates, without the need for a system for checking employees’ expenditure. The employer will simply have to ensure that the employee has in fact undertaken qualifying business travel.

There are also proposals to introduce a statutory exemption for overseas scale rates. These scale rates are more complex as the amounts payable depend on where the employee has travelled to and for how long. The changes to legislation will mean that employers can use the HMRC overseas scale rates subject to the requirement to ensure that the employee has undertaken qualifying overseas business travel.

Markel Consultancy Services Limited is an Appointed Representative of Markel International Insurance Company Limited which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Insurance is underwritten by Markel International Insurance Company Limited. Financial Services Register Number 202570.